The Asian Development Bank (ADB) has approved a US$300 million loan to help PT Geo Dipa Energi, an Indonesian state-owned company, expand its geothermal power generation capacity by 110 megawatts in Java, said the agency today (05/28) - Photo by CMMA Office

JAKARTA (TheInsiderStories) — The Asian Development Bank (ADB) revises its economic outlook for Indonesia, with growth to slightly moderate at 5.1 percent this year from a year earlier 5.2 percent, before edging back to 5.2 percent in 2020, said the agency at their latest report on Wednesday (09/25).

In the 2019 State Budget, the government targeting economic growth 5.2 percent. According to ADB, the slightly slower pace of expansion this year reflects a downturn in exports and moderating domestic investment.

“Robust consumption should see Indonesia’ economic expansion continue at a healthy pace this year and next year. Stronger investment is needed to boost growth, with a focus on competitiveness and human capital development being key,” said ADB Country Director for Indonesia Winfried Wicklein.

He revealed, investment is expected to improve toward the end of the year, as progress continues with the construction of national strategic projects that are upgrading infrastructure networks. Recent cuts by Bank Indonesia to the policy rate are also likely to give a fillip to credit growth.

In 2020, private investment should continue to improve as new reform initiatives are expected to be launched toward improving the business climate and accelerating the modernization of the economy.  While, consumer spending should maintain robust growth this year and next year, underpinned by rising household incomes, job growth, and low inflation.

Inflation is likely to remain stable at 3.2 percent this year and 3.3 percent in 2020, which should help sustain momentum in private spending. Core inflation is expected to remain anchored and food prices unchanged.

Despite weakening growth among trade partners that has affected Indonesia’s trade balance, the deficit in the current account should be contained at 2.7 percent of gross domestic product (GDP) this year. With investment and economic growth projected to pick up, the current account deficit is expected to widen to 2.9 percent of GDP in 2020.

By sector, services are expected to maintain robust growth, boosted by a growing youthful population that is expanding its use of online services. Within industry, construction will likely benefit from urban property development. The new administration’ commitment to adopt new technologies should increase manufacturing capabilities and lead to gains in competitiveness in the medium term.

External risks to Indonesia’ economic outlook include global trade tensions and weakening trade momentum, both of which must be closely monitored. Moderating investment is also a concern and it is important for Indonesia to stay the course with its reforms to diversify the economy and to open itself to opportunities associated with an emerging reshaping of global supply chains.

Previously, finance minister Sri Mulyani Indrawati revised her prediction on Indonesia’ economic growth in the second half (2H) of 2019 at 5.11 percent amid the widening deficit. Last July, she still optimistic the growth in the 2H to be at 5.2 percent, higher than the 1H realization of 5.1 percent.

With the assumption, she continued, by the end of this year, the economic growth closed at 5.08 percent compared to the outlook in the 2019′ State Budget set at 5.2 percent.

The minister said the projected growth in 2019 has been calculated on the global and domestic conditions, especially influenced by weakening public and government consumption. Public consumption was predicted grow only grow 4.97 to 5 percent, from initially projection around 5.33 percent.

The minister also saw investment in the second semester being rather difficult to predict. She rated, “This investment is the most tricky thing because we see that in the second semester with interest rates starting to decline there is also capital inflow.”

She hope that in the 2H the investment conditions become stronger, especially as the election season is over. Meanwhile, exports in the second semester are predicted to remain in the negative zone.

However, Indrawati said the government still included the outlook for Indonesia’ economic growth this year of 5.2 percent. This figure is an assumption for the basis for calculating the estimated several items in the 2019 APBN.

In the 1H, economic growth was still driven by an increase in domestic demand. She explained that household consumption is projected to grow higher because of the support of low inflation and the distribution of social assistance that is on target and on time. As for the realization of the 1H, inflation was 3.3 percent and is estimated to be 3.1 percent in the second semester.

While, the 2019 state budget revenue and expenditure deficit are expected to widen from the government’s plan to Rp310.8 trillion or 1.93 percent of GDP. In fact, based on the 2019 State Budget Act, the budget deficit is set at Rp296 trillion or 1.84 percent of GDP.

The state budget deficit outlook, according to the minister, was made based on fiscal macro conditions this year. In detail, the deficit is caused by state revenues estimated at Rp2,030.8 trillion or 93.8 percent of GDP, which consists of tax revenues of Rp1,643.1 trillion and Rp386.3 trillion of non-tax state revenues.

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